Trade war blueprint
US President Donald Trump’s recently published trade policy agenda leaves absolutely no room for nuance. Not even the tiniest crack has been left to allow light to be shed on the possible trade-offs.
The narrative-heavy document confidently answers its own rhetorical question as to why higher tariffs will help the President Make America Great Again with two little words: “It’s simple”. It argues that through aggressive and/or reciprocal tariffs, a high-wage, job-rich, innovative and secure “Production Economy” will emerge, increasing manufacturing’s GDP share, raising real median household income, and decreasing the size of America’s trade deficit.
What’s not to like?
The problem is that trade and industrial policies are never simple, either in design or in application. There are always consequences, many of them unintended. Some of these can be absorbed, others have oversized impacts on industrial competitiveness, production costs and consumer prices.
South Africa currently has, in its long-steel sector, a live example of the real-world effects of an industrial strategy that has been combined with a trade policy intervention. To facilitate upstream competition after having extended trade protection in favour of the country’s last remaining flat-steel producer, ArcelorMittal South Africa (AMSA), government introduced a price preference system on scrap metal in 2013 and an export tax on scrap in 2020 to lower the cost of input material to electric arc furnace (EAF) steelmakers.
The combination has indeed bolstered the competitiveness of the EAF steelmakers, which mostly produce long products, often in the form of reinforcing bar. At the same time, though, it has undermined the viability of AMSA’s integrated Newcastle mill, which produces steel using iron-ore and coking coal as inputs.
Despite protracted attempts to prevent the mill’s closure, AMSA has taken the decision to place the Newcastle facility into care and maintenance, together with its other longs businesses at Vereeniging and at the old Highveld Steel operation. The closure will affect thousands of workers and there is serious concern for the future of lives and livelihoods in the mill’s host town in northern KwaZulu-Natal, given the centrality of the operation to the local economy.
The net economic picture emerging from this policy intervention is blurred, as the scrap advantage has helped reduce some downstream prices and facilitate some competition. Nevertheless, the associated fallout serves to illustrate the complexities involved when making trade or industrial policy decisions.
Given the highly integrated nature of global supply chains, it will be no easy task to replace imported intermediate products with ones made in America, let alone to do so quickly and without raising costs and, as a consequence, prices.
More worrying, though, are the growth and trade implications that are likely to arise should America’s blunt-instrument approach to trade policy trigger an all-out trade war.
As the world has learnt to its peril, such beggar-thy-neighbour trade policies have previously morphed into real and deadly hot wars – a lesson that billionaire investor Warren Buffett recently echoed when he cautioned that tariffs are “an act of war”.
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